Sometimes a headline tells a story that simply does not exist. Today is a great example.

In an AP story the headline reads "Sirius Satellite Radio CFO Sells Shares". This has to be a big story, right? After all, Sirius is in the midst of a merger, and why would the CFO sell shares if he felt thigs were going well?

The SEC Filing tells the whole story.

Explanation of Responses:
( 1) Shares of common stock sold are equal to federal and state taxes due on March 15, 2008 as the result of the vesting of the restricted stock units and the related brokerage commission on the sale.

Long story made short is that such sales are pretty typical. This represents a paperless transaction. Frear had restricted stock that vested. Upon vesting, the capital gain applicable taxes are due. Enough stock is sold to cover the tax expense of the capital gain applicable tax, and brokerage fees. More often than not, such sales have nothing to do with the sentiment of the insider relating to the stock or the company. It is simply a matter of Uncle Sam getting his share.

The AP story probably generated a lot of web hits, but there really is no story here.

4 Responses to “AP Headline Looks For Story Where None Exists”

>>>Upon vesting, the capital gain taxes are due. Enough stock is sold to cover the tax expense of the capital gain, and brokerage fees.

One correction Tyler (and I’m not nitpicking), just pointing this out… this isn’t a “capital gain” per se.

The actual granting of Restricted Shares to an employee is seen as compensation. When the Shares vest and the “risk” is removed from the grant, the employee must recognize this compensation — based on the original grant price of the Shares — as Earned Income. This Earned Income is not taxed at Capital Gains rates — but rather at whatever the employees Earned Income tax bracket is. You’ll note that the amount of shares sold will most often raise much more than typical capital gains rates — again, it depends on the employees earned income tax bracket.

Then to complicate matters, since the shares have vested, the number of shares sold to cover this taxable event THEN themselves become taxable as a Capital gain/loss.

For example, if you’re granted 100,000 shares at $5 each and they all vest on a certain date — then your earned income on that date will be $500,000. The company will automatically sell a number of your shares to cover the income tax on that amount — based on your tax bracket. In this case, it would put you in the 35% tax bracket, so you would then owe approximately $155,000 in taxes (based on the bracket). So the company would automatically sell enough shares to cover this amount.

If the stock is at $6 when this occurs, then they would need to sell 25,834 shares to raise enough to cover the $155,000 in taxes. However this would also cause a capital gain event, between the $5 grant price and the $6 sale price — so those 25,834 shares sold, would reflect $25,834 in short term capital gains, which would need to be reported and taxes paid at the appropriate time.

If the stock was at $4 when the vesting and sale occured, then 38,750 shares would need to be sold to cover the income tax. But this time, the sale would cause a capital loss — in this case of $38,750.

The reason it’s all complicated like this? Sarbanes-Oxley. The way companies have to recognize all of this is even more complicated… it’s the reason most companies just automatically sell the shares for you to cover the taxable event. Because it effects how the recognize the compensation on their books.

Agreed. I was trying to keep the article short sweet and to the point to avoid confusion, as the main point is that the sale of these shares was not really a newsworthy event. I will modify the article to simply say “taxes”.

You really didn’t have to modify your article, I wasn’t looking to argue or correct you. I was more pointing out just how complicated this whole situation is — brought on by Sarbanes-Oxley. Because of this — and the need to expense all employee options/restricted share grants — companies now must carry outstanding unvested options/share grants as a liability on their books until they vest. Then companies act quickly to remove them from their books — which is why they sell shares for the income tax for you… the sooner it’s off their books… They’re doing what is best for the company.

So few actually understand how and what is going on — that you see articles like that AP article. My post here was merely to open up the dialogue so that others can read what is really going on. I agree, it is not sales to dump shares — but merely an SOP at this point. Shareholders should not look at sales like these in a bad light. Unfortunately, it’s going to be a number of years before the understanding of this works its way down to the common shareholder.

I did not take it that you were being argumentative, and welcome your comments. What you pointed out was quite correct, and that is a great service to the readers. When you pointed it out I thought it appropriate to modify the language in the article because as you stated there can be a lot of confusion.

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